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Podcast: Letting the High-Income Tax Cuts Expire

August 3, 2010

In this podcast, we’ll discuss the tax cuts that are set to expire at the end of the year. I’m Michelle Bazie and I’m joined by Chuck Marr, the Center’s Director of Federal Tax Policy.

1. Chuck, most of the tax cuts enacted in 2001 or 2003 are slated to expire at the end of this year, including those that disproportionately benefit the highest-income Americans – specifically single filers with incomes over $200,000 and married filers with incomes above $250,000. Should these high-income tax cuts be allowed to expire?

Yes, Michelle, the tax cuts that exclusively go to the two percent of people with the highest incomes should expire. These tax cuts are simply unaffordable.

2. What about the other tax cuts? Should they be allowed to expire?

For the economy right now, it is most important to extend the middle class tax cuts. Middle class people are more likely to live paycheck to paycheck. If their paychecks get smaller, they will spend less and the economy will suffer.

High income people are different. They are more likely to save, rather than spend any increase in their incomes. The economy needs the boost from people who will spend more now. This is why tax cuts for high-income people are a very inefficient way to generate economic activity and job creation.

3. What should be done with the revenues from allowing these tax cuts to expire?

Policymakers should temporarily redirect this money to more efficient ways of boosting the weak economy while over the long-term dedicate the money to reducing budget deficits. This approach would help the nation address two key challenges: short-term economic weakness and unsustainable long-term deficits.

4. How would those funds be used to promote growth and boost the economy, exactly?

Over the next year, policymakers could channel the savings from letting the tax cuts expire — about $40 billion in 2011 — to uses that have more “bang for the buck” in creating jobs and promoting economic growth at a time when the country needs it most.

Right now nearly one in ten Americans is out of work. Instead of extending the high income tax cuts, it would be much more efficient to provide a tax incentive for businesses that hire more people. We need to focus on the bottom line – jobs.

It is also very important to provide adequate unemployment benefits for people who are trying but cannot find a job. Unemployed people are strapped for cash. This means that they quickly put their unemployment insurance money right back into the economy.

5. What about helping states that are facing historically high budget gaps?

One of the biggest risks to the economy today is that state and local governments are raising taxes on average people and cutting vital services and firing people. It is important that the federal government channel money to states so that the states don’t drag the economy down or hold it back.

Any of these steps would stimulate the economy far more than continuing tax cuts for high-income people who tend to save – rather than spend –increases in their after-tax income.

6. How do we know that these are the best ways to use the funds?

In an analysis that was released this January, the non-partisan Congressional Budget Office suggested that using this money for a new job-creation tax credit and continued state aid would deliver three times as much economic growth per dollar of cost as extending the tax cuts for high income people.

Michelle, if Congress extends these high-income tax cuts, deficits and debt will be about one-trillion-dollars higher over the next decade than if it lets them largely expire. In subsequent decades, extending the high-income tax cuts would increase deficits by even larger amounts. We would face higher deficits as far as the eye can see!

8. What’s the bottom line?

Letting the high-income tax cuts expire as planned is simply the responsible thing to do. It makes sense for both short term job creation and the long term budget outlook.